DraftKings CEO Jason Robins defended on Friday a first-of-its-kind surcharge on winning bets the company plans to implement in high-tax states like New York and Illinois.
Robins explained the surcharge on the company’s second-quarter earnings call as a mechanism to ensure DraftKings pays no more than a 20% tax in any state, keeps promos and marketing consistent regionally, and achieves positive adjusted EBITDA next year. The surcharge is scheduled for Illinois, New York, Pennsylvania and Vermont beginning January 2025, or Week 18 of the NFL season.
“Obviously, some people might just react negatively to the idea of being charged at all,” Robins said. “We feel it is an important step that consumers will ultimately understand if they feel the product and experience is better, then they’d rather pay for that than somewhere else that maybe doesn’t have as strong a product.”
DKNG shares are down 10.3% since the announcement amid a volatile Friday market, trading at $31.91 a share on about double their normal volume.
Would take ‘quite a lot’ to get rid of charge
Robins said it would take “quite a lot” of top-line deterioration to make the surcharge “not worthwhile,” addressing whether the added fee might drive customers away.
“As of now I don’t think there would be any reason that we wouldn’t implement it,” Robins said. “But obviously, we’re paying close attention to customer feedback, and if we hear anything that makes us change our mind, we’ll certainly let you know.”
The decision comes a month after a tax hike in Illinois took effect. Larger-scale operators like DraftKings are likely to be hit the highest tier, 40%, vs. the 15% they had been paying.
Revenue guidance lowered
DraftKings expects to lose $50 million in adjusted EBITDA from change this year, one of several headwinds the company outlined as it lowered adjusted EBITDA guidance for 2024 by 24% after raising it last quarter. Many had already priced that change into the stock.
Caesars, which likely will qualify for a lower tax rate under the Illinois structure, is expecting a $5 million headwind from the change.
DraftKings details its surcharge
An earnings presentation demonstrates how the surcharge could work in Illinois, where a $10 bet to win $20 would be subject to a $0.32 fee, effectively increasing the odds from +100 to –104. The presentation, however, maintains that any descriptions are for illustrative purposes only.
Robins hopes the surcharge will prevent other states from considering tax hikes.
He did not address why DraftKings opted to announce an after-bet charge as opposed to reflecting the fee in offering worse odds on bets. He has disnissed the notion in the past that the customers DraftKings wants come to the platform because of its prices.
‘This is what’s best for us’
DraftKings is able to offset expenses in states with tax rates closer to 20% by reducing spending on advertising, marketing, and promotions, bringing its margins post-tax in line with other states, Robins said. But New York’s nation-high 51% tax rate makes it impossible to achieve similar profitability levels without imposing a surcharge tax, he added.
“I think we believe this is what’s best for us. And I would imagine that if that’s our calculus, then others would come to the same conclusion. But we really don’t know and we’ll have to see.
And, obviously, there might be other ways, too, that – other ideas for how to implement something like this that might be better than what we came up with. We thought through this quite a bit, but you never know. So we do have some time between now and January 1st, and we’ll see what happens.”
What will FanDuel do?
Investors and bettors will likely find out if DraftKings’ chief competitor, FanDuel, came the same conclusion when its parent company, Flutter, reports earnings on Aug. 13.
“In the event its competitors do not follow a similar action or market share erodes to the point of a negative outcome, we do not see the company continuing with the initiative and implementing other offsets, such as adjusting betting lines,” Jordan Bender of Citizens JMP Securities said in an analyst note.
Stock buyback, revenue growth
While the surcharge and guidance slash dominated most of the call, investors did see some good news from DraftKings.
DraftKings reported $1.1 billion in revenue, up 26% year over year, on par with most Wall Street estimates, and earnings per share of $0.12, beating estimates of a $0.01 loss. Adjusted EBITDA for the quarter was $127.9 million, up 75% year over year, but 5% shy of estimates.
The company plans to return some of that growth to investors, in a move that should add cash flow flexibility going forward. It plans to buy back $1 billion in stock over the next two to three years.
Market share stagnant
DraftKings’ combined share of the US online sports betting and iGaming market was 29.8% in Q2, about the same as in Q2 2023. Its share through the first six months of this year is up about 3 percentage points from last year.
After lowering sales and marketing costs for the past three straight quarters, those costs were up 4% year-over-year, but still down 6.7% from the first half of last year.
Robins said customers were cheaper to acquire at this juncture, an investment he anticipates will pay off in the second half of the year as many of those customers turn revenue-positive. He anticipates sales and marketing expenses to increase at a “mid to high single-digit rate year-over-year” primarily due to the company’s $750 million acquisition of online lottery retailer Jackpocket.
“Investment in 2024, like mentioned, will only push revenue growth up in 2025,” Bender said in his note. “What the company made clear during earnings despite the noise is its willingness to pull back profitability for the sake of growth, which should be viewed in a positive light for investors.”
Customer acquisition trending in line with competitors
New customers increased nearly 80%, while customer acquisition costs were down 40%, year-over-year, in line with what competitors like Caesars and BetMGM have reported so far.
DraftKings reported 3.1 million average monthly unique players during the quarter, up 47% year-over-year, which DraftKings largely credited to expanded offerings in new states and acquiring Jackpocket.
Average revenue per MUP was down to $117 vs. $137 last year, which DraftKings attributed to lower contributions from Jackpocket customers who were not included in the calculation last year.
Surcharge unlikely to impact hold: Robins
Structural sportsbook hold for the quarter was roughly 10%, up from 9.5% in Q1, and “trending in line with expectations” as DraftKings looks to hit 10.5% for the year.
“Hold is largely still a bet mix thing. We feel like there’s a ton of room to increase our parlay mix and average leg count, and we’re also focused on other parts of the betting platform as well, like live betting,” Robins said. “It’s a little more balanced than last year when it was all about hold rate and bet mix, but we’re still very focused on bet mix.”
Robins expects the popularity of parlays to make the surcharge more tenable. DraftKings has seen no decline in handle as its increased hold through pushing more parlays and those with higher leg counts.
“Players betting parlays will be less sensitive because the payout is already very large,” Robins said. “We’re hopeful that our product and investment into the customer experience is strong enough that we have players across the spectrum, and they view us as worth paying maybe a few extra cents on a bet, but certainly, we’ll have to see how that plays out.”
